As a rising star in the Solana ecosystem, Jupiter has quickly established itself in the DeFi space. However, without a solid economic model and stable token price to support it, it could easily fall into a death spiral, which could have fatal consequences for Jupiter itself. This article, written by Go2Mars from the Web3 Research Institute, provides an overview of Jupiter’s core functionalities and other ecosystem modules.
Jupiter’s Three Core Functionalities
Jupiter’s products have gained attention due to their three core functionalities: liquidity aggregator, limit orders, and DCA (Dollar-Cost Averaging) investment.
Core Functionality Module 1: Liquidity Aggregator
Jupiter’s liquidity aggregator technology is one of its core competitive advantages. In traditional DEX models, liquidity pools are isolated in each exchange, requiring users to search for the best pools to obtain optimal trade prices, which is time-consuming and inefficient. Jupiter’s liquidity aggregator technology can traverse multiple liquidity pools within the Solana ecosystem, automatically finding and aggregating the best liquidity resources to provide users with a one-stop best trade route. Users can customize parameters such as transaction fees, slippage size, and whether to use a direct path before trading. This means that users can obtain the best trade prices and lowest slippage across the entire ecosystem, improving the efficiency and cost-effectiveness of asset exchanges. Jupiter’s trade aggregation is based on its backend smart routing technology, which continuously monitors and analyzes market data such as prices, depth, and slippage in real-time. The smart routing algorithm dynamically selects the best trade route for each transaction, ensuring the success rate and cost efficiency of user trades even in highly volatile market conditions. The algorithm searches for the best trade routes by considering not only direct token swaps but also potential intermediate token conversions, aiming to find the lowest-cost trading solution. Despite the complexity of the underlying smart routing technology, Jupiter is committed to providing a user-friendly trading experience. Users only need to input the tokens and quantities they want to exchange, and the smart routing system will handle the rest automatically. This design minimizes the complexity for users, allowing even those without technical backgrounds to easily trade.
Core Functionality Module 2: Limit Orders
Jupiter provides limit order functionality, which effectively mitigates the impact of price fluctuations and slippage during trading, while also avoiding MEV (Miner Extractable Value) issues. With limit orders, users can partially execute orders and receive tokens for the executed portion when orders are not fully filled. Users can set parameters such as order validity period, exchange price, and quantity to execute their trading strategies more precisely. The protocol collaborates with Birdeye for on-chain price data and uses TradingView technology for chart data presentation, making Jupiter’s user experience more similar to centralized exchanges.
Core Functionality Module 3: DCA (Dollar-Cost Averaging) Investment
Dollar-Cost Averaging (DCA) is an investment strategy where investors periodically invest a fixed amount at specific time intervals to average their buying costs within a predetermined price range. This method helps investors reduce the risk of investing at a single price point. With Jupiter’s DCA feature, users can set the purchase frequency (ranging from minutes to monthly), purchase price range, total time period, and assets they wish to purchase. After initiating DCA, users’ tokens will be transferred to an account associated with DCA, and transactions will be automatically executed based on the predetermined price range and frequency. Once the DCA period ends, the tokens will be transferred back to users’ wallets, and the protocol charges a fee of 0.1% for the DCA service. With controllable cost basis, low fees, and a fully custodial trading process, DCA becomes a good choice for traders to accumulate assets during bear markets. However, this mechanism may have limited demand during bull markets.
Other Ecosystem Modules of Jupiter
Upstream Incubator: Jupiter Labs
Jupiter Labs is an independent lab operating separately from Jupiter, dedicated to driving innovative projects. Jupiter users and community members have certain privileges, including priority access and token incentives. Currently, Jupiter Labs is focusing on two major project areas: perpetual contracts and LSD stablecoin.
Derivative Protocol: Jupiter Perpetual
Jupiter Perpetual is a derivative protocol launched by Jupiter Labs, which is similar to GMX V1 and is currently in practical use. The protocol defines two main participants: liquidity providers and traders. Liquidity providers deposit funds into the pool, which are converted into a basket of tokens, primarily including BTC, ETH, SOL, USDC, and USDT, with SOL and USDC having higher weights as the main trading assets. When traders engage in leveraged trading, they use tokens in the pool to establish leveraged positions without worrying about trading slippage. They only need to pay trading fees and borrowing fees based on token utilization rates. Liquidity providers receive 70% of the trading fees and all borrowing fees but also bear the risk of traders’ profits and token depreciation.
LST Stablecoin Protocol: XYZ
This project has not been launched yet. The protocol is similar to Lybra V1 and allows users to mint interest-bearing stablecoins (SUSD) by collateralizing SOL. The income generated from LST staking will be distributed to SUSD holders and governance tokens. What sets it apart is that when LST yields are higher than SOL borrowing rates, the protocol will adopt a leveraged arbitrage strategy to maximize returns. Additionally, the protocol introduces a redemption mechanism to maintain price stability for SUSD. However, this may impact borrowers’ positions, especially during market volatility. To mitigate this issue, the protocol may implement a redemption strategy using governance tokens within a small price range. When the SUSD price is between $0.95 and $1, the protocol may use governance token redemption to reduce the frequency of borrower redemptions. However, this approach may result in the majority of redemptions being governance token redemptions, creating a potential issue of excessive token issuance if the price remains below $1 for an extended period.
Returning to the $Jup Economic Model
JUP token is the governance token in the Jupiter ecosystem, allowing token holders to vote on crucial ecosystem decisions, including project launches, dispute listings, and grants. The Jupiter team commits to strictly following the roadmap for token distribution, with any transfers from cold wallets requiring a six-month notice. The initial circulating supply has been adjusted to 1.35 billion, and future circulation will be managed through a community multisig wallet to ensure the healthy development of the Jupiter ecosystem.
Looking Beyond the Initial Success: Thoughts on the Prosperity of the Jupiter Ecosystem
Compared to other DEX projects in the Solana ecosystem, Jupiter stands out in terms of trading efficiency and user experience. Despite competition from projects like Raydium, Orca, and Serpent, Jupiter still aggregates over 50% of the trading volume on Solana, making it a true underlying liquidity protocol for DEX on Solana. However, with limited room for further growth in trading volume, Jupiter has chosen to horizontally expand in the DeFi sector, broadening its business scope as a long-term strategy. Jupiter Start, or the expansion of Jupiter’s territory, is the main direction for this expansion.
Currently, Jupiter Start only offers introductions, education, and pre-launch functionalities. The core functionality of Jupiter Start, LFG Launchpad, has not been released yet, but the first round of launchpad voting was initiated on March 7, with Zeus Network (cross-chain communication), SharkyFi (NFT lending protocol), and UpRock (DePIN) ranking in the top three projects. Jupiter has a large user base, which creates strong network effects. Considering its own resource advantages, projects launched by Jupiter may have higher quality.
Furthermore, the financial innovation project incubation platform, Jupiter Labs, fills the gap in related projects on Solana and still holds great potential with the support of Jupiter. This project demonstrates in-depth exploration in the field of financial derivatives and stablecoins, aiming to bring new momentum to the DeFi sector in the Solana ecosystem. However, these innovations bring additional risks, such as protocol risks and oracle pricing risks, which need to be balanced through the construction of a robust economic model, appropriate incentive mechanisms, and dynamic redemption strategies to maintain system stability.
As a rising star in the Solana ecosystem, Jupiter has quickly established itself in the DeFi space. Its user-centric product design philosophy, comprehensive and innovative product functionalities, and smooth trading experience have successfully gained the trust of users, making it the largest DEX in terms of trading volume on the Solana chain. In addition, Jupiter’s efforts to break through the limitations of traditional DEX imposed by blockchain development issues and actively explore broader development spaces give it the potential to become a major player in the industry.
However, the potential issue that arises from the exploration of derivatives and stablecoins, whether as an incubator or self-developed products, is the increased risk involved. As these financial products aim for high returns through leverage, without a solid economic model and stable token price to support them, they are prone to falling into a death spiral, which could have fatal consequences for Jupiter itself.